Market Data 
- The US Dollar rallies on all fronts, with antipodes as outliers.
- Markets are trembling with fear after the EU election result forced Macron to call for snap elections.
- The US Dollar Index pops above 105.00 and hits a fresh four-week high.
The US Dollar (USD) edges higher and extends its rally on Monday following upbeat May Nonfarm Payrolls data on Friday. The main driver for the second leg higher comes from European elections over the weekend, where the Far Right parties gain ground in the European Union (EU). The results in France were even so devastating for French President Emmanuel Macron and his ruling coalition that he called snap elections for June 30 and the run-off on July 7.
On the economic front, it is a very calm start to the week. On Wednesday, the focus will be on the US Consumer Price Index (CPI) release for May and on the US Federal Open Market Committee (FOMC), which will decide on the Federal Reserve’s (Fed) monetary policy interest rate and will release a fresh dot plot and economic projections.
Daily digest market movers: US to digest European election results
- On Sunday, the European election results were released with some key takeaways:
- French President Emmanuel Macron saw his party coming in third, way behind the two parties that won the most votes. This forced President Macron to call for snap elections.
- In Italy, the Far Right’s current leading Prime Minister Giorgia Meloni’s party won another substantial amount of votes and further cemented the Far Right gains for her government in Italy.
- The US Treasury will have its work on Monday with three bond allocations:
- At 15:30 GMT, a 3-month and a 6-month bill will be released.
- At 17:00 GMT, a 3-year bond will be auctioned.
- Equities are in the red across the board, especially in Europe. The Euro Stoxx 50, the European equity benchmark, is falling over 1%. US equity futures are just slightly in the red.
- There has been a sharp shift in the Fed rate cut expectations for September. The CME FedWatch tool shows that 30-Day Fed Funds futures pricing data suggest a 49% chance that interest rate will be lower than the current level in September, significantly down from the 59.6% recorded a week ago.
- The benchmark 10-year US Treasury Note prints a fresh seven-day high at 4.46%.
US Dollar Index Technical Analysis: If and only if
The US Dollar Index (DXY) has snapped some crucial technical levels in its run higher over the past two days. Trading even above the 55-day Simple Moving Average (SMA) at 105.04 on Monday, it will be key to see if this level can hold as support by Wednesday when a rather hawkish Fed might lay out the plan for the DXY to jump back to 106.00. That would mean even a possibility for a fresh 2024 high, depending on the message US Fed Chairman Jerome Powell delivers to markets.
On the upside, there are some technical or pivotal levels to watch out for. The first is 105.52, a pivotal level that held support during most of April. Next comes at 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. The biggest challenge remains at 105.51, the year-to-date high marked on April 16.
On the downside, a trifecta of SMA’s is now playing as support. First, and very close, is the 55-day SMA at 105.04. A touch lower, near 104.45, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines in the US Dollar Index. Should this area be broken down, look for 104.00 to salvage the situation.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
